Inheritance Tax – Sisters Lose Test Case

For 30 years, Joyce and Sybil Burden, aged 90 and 82, have been battling to ensure that when one of them dies the other does not need to sell the home they share in order to pay an inheritance tax bill without success. However, when civil partnerships became lawful they thought they might be able to use discrimination legislation to aid their case. Were they not related, they could have formed a civil partnership and no IHT would be payable when the first sister dies but as they are related they are not permitted to do so. They have lost their appeal in the European Court of Human Rights (ECHR).

The ECHR held by 15 votes to two that the Civil Partnership Act does not breach the prohibition of discrimination under Article 14 by not giving them exemption from IHT. The court said that as a marriage or Civil Partnership Act union is forbidden to close family members it was right that the sisters were denied the exemption. The sisters have written to the Chancellor of the Exchequer every year since 1976 asking to be treated as a married couple. Although it is within the Government’s power to make an exception it is unlikely they will choose to do so.

However, there are a number of steps individuals can take to minimise IHT that in some quarters has been described as a voluntary tax on those not wise enough to plan to avoid it. For a start, assets given away more than seven years before someone dies are entirely exempt and many individuals give their assets and houses away to avoid the tax entirely. There are complex rules against “reservation of benefit” but with legal advice many lawful arrangements that completely avoid the tax are possible. Secondly, for spouses there is no IHT until the second spouse dies and even then that spouse has the benefit of both their and their spouse’s IHT exemption band. Thirdly, most of those who die do not pay IHT simply because they are well below the threshold.

For 2008-2009 this is £312,000. It is only those with assets worth £312,000 or more who have IHT to pay. Fourthly, even with recent legal changes it is possible to put some assets in trust to avoid the tax. Many individuals put their life insurance policies into trust for their children, which avoids IHT in most cases. In addition, life policies can be taken out and put in trust and the proceeds used to pay the tax. Finally all the IHT does not have to be paid at once. HMRC allow payments over ten years.